Fitch Rates State of Nuevo Leon, Mexico 'A--mex--'

NEW YORK--(BUSINESS WIRE)--July 16, 2003--Fitch Ratings has assigned an 'A(mex)' national scale issuer (or senior unsecured debt) rating to the State of Nuevo Leon. The State of Nuevo Leon is one of the 31 states of the United Mexican States (UMS).

Among the favorable factors supporting the rating are: (1) outstanding levels of own-source revenues, particularly taxes and user fees and significant increase in local revenue collections in recent years; (2) adequate and stable cash flow surpluses available for debt service and capital investments; (3) strong management evidenced by adequate information technology, planning and control systems, good financial disclosure and external audits; (4) dynamic economy enjoying above-average socio-economic conditions, high participation rate and strong links to foreign trade.

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On the other hand, the rating is limited by high debt levels in spite of declining trends in recent years relative to ordinary fiscal revenues (OFRs, or available revenue comprising own-source revenues plus participations in federally-collected revenues as well as revenues from the State Fiscal Strengthening Program or PAFEF) and cash flow surpluses from operations. In 1998, the state's direct debt accounted for 0.61x OFRs. However, the total debt (direct debt plus state-guaranteed obligations of decentralized agencies and municipalities) represented 1.38x OFRs. Direct debt service (principal and interest) constituted 9.1% of OFRs. By the close of fiscal year 2002, the outstanding balance of direct and total debt accounted for 0.36x and 0.74x OFRs respectively, and the direct debt service burden claimed 6.6% of OFRs.

Furthermore, the guaranteed obligations of the water and wastewater agency (Servicios de Agua y Drenaje de Monterrey, accounting for 57.2% of the indirect debt of the state) currently represent a much less burdensome contingency than in prior years. The agency has made significant improvements in both operating and financial performance as well as liquidity. The largest contingent liability affecting the state is associated with pensions. Actuarial studies have indicated the growth in extraordinary contributions the state must make to fund the pension system, which absorb a significant portion of the OFRs of the state. It is expected that this portion will continue to increase though moderately in the next few years.

Finally, as usual for Mexican states, Nuevo Leon's rating is limited due to a considerable dependence on the system of participations in revenues collected by the federal government on behalf of the sub-sovereign sector although the state generates a greater proportion of own-source revenues than other states rated by Fitch, excluding the Federal District.

During fiscal year 2002, the State of Nuevo Leon collected Ps1,291 million from the state's payroll tax (the highest population-adjusted level of any state rated by Fitch) for a total of Ps1,476 million in state taxes and Ps3,213 million of all own-source revenues. Taking the federal participations into account (Ps7,322 million excluding the portion allocated to municipalities) and the revenues from the PAFEF program(Ps673 million), OFRs rose to Ps11,208 million. Of this total, 44.8% (Ps5,022 million) funded the state's operating budget (including teacher payrolls) and 31.3% (Ps3,512 million) was transferred to the legislative and judicial branches of government, the Autonomous University of Nuevo Leon, the ISSTELEON (state's social security fund), electoral authorities and other trusts and agencies of the state. The remaining 23.9% (Ps2,674 million) represents operating cash surplus, which funded interest and principal payments (Ps735 million) and, together with accumulated cash balances, capital investments of Ps3,959 million.

In 1993 the state recognized the unsustainability of the pension fund's balances and passed laws to reform the pension system. Under the new law, the state moved from a defined benefit system to individual accounts, thereby mitigating the long-term liability. However, benefits that accrued to workers during the transition period must be absorbed by the state and are to be funded through extraordinary contributions; in 2002, the contributions rose to Ps1,307 million equivalent to 11.7% of the OFRs. This ratio is likely to continue to increase to an expected peak level of 14% of OFRs by 2022.

As regards the state water agency (SADAM), financial results have been very favorable, generating in 2002 cash flows of Ps702 million, which supported by draws on accumulated cash balances, afforded ample liquidity for debt service payments (Ps476 million) and capital investments in infrastructure (Ps1,110 million). SADAM is one of Mexico's best managed water utilities. It serves a very large area and has capacity for 100% of the wastewater service within the state. Although the agency's outstanding bank debt balance is significant (Ps2,428 million at 31 March 2003), it should not represent a serious concern for the state as long as the current financial and operating performance of the agency continue.

At March 31, 2003, the outstanding direct debt stock rose to Ps4,035 million. Indirect obligations collateralized by federal participations totaled Ps4,214, of which Ps2,428 are attributed to SADAM, Ps1,241 to Metrorrey and Ps545 million to other agencies and trusts of the state.

The State of Nuevo Leon lies in the north-east region of the country between the states of Coahuila and Tamaulipas and borders with the State of Texas in 19 kms. The gross product in 2002 was estimated at US$44 billion - the third largest regional economy of the United Mexican States; Nuevo Leon contributes 7.3% of the national GDP and generates a per capita GDP 1.8x the national average (second highest in the country). Manufacturing and services contribute the most to the economy and contain some of Mexico's most important industrial conglomerates. In 2002, the state population was estimated at 4.01 million (3.95% of the national total), with Monterrey - the capital city - the largest urban center. Monterrey, comprising seven municipalities, represents the third largest metropolis of the nation. The social profile of the state is above average and ranks second (after the Federal District) in terms of low levels of poverty.

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